IFRS 15 Revenue

Question 1

Five steps of revenue

Answer 1

1. Identify the contract
2. Identify the performance obligations
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognise revenue when performance obligation is satisfied

Question 2

Identify the contract

Answer 2

The economic reality of the transaction must be a sale
Both parties must approve
Right and payment terms identified
commercial substance
Probability of getting paid
Determine who is principal or agent

Question 3

Identify the performance obligations

Answer 3

Identify separate performance obligation
1. Performance obligations are separately identifiable within the
contract e.g. phone contract - phone, data, calls
2. This is also the same when you give free products based on
customer achieving a set objective. buy 2 get 1 free e.g. revenue and deferred revenue when customer has not yet achieved objective

Question 4

Determine the transaction price - variable consideration, credit risk, sale at return basis, BNPL

Answer 4

Transaction price is the amount expected to be received

With variable consideration an estimate should be made of the expected value or the most likely amount. include if highly probable that it would not reverse.

Time value of money may be relevant

Credit risk does not affect measurement of transaction price but provision for bad debt should be recognised

If there is a high probability of returns, the revenue amount should reflect this, the difference in cash received should be posted as a liability (deferred income) - sale at return basis

BNPL
In substance seller is providing finance , and must take time value o money. Revenue is amount after taking into account time value of money (will be lower) difference is posted to inter

Deferred income
receive cash now but fulfil performance later, debit cash and credit deferred income and recognise income as you fulfil performance obligation

Question 5

Allocate the transaction price to the performance obligations

Answer 5

allocate based on individual prices

Question 6

Recognise revenue when performance obligation is satisfied

Answer 6

This is to do with timing, when should we recognise allocated revenue.

This is when the entity satisfies the performance obligation, Seller satisfies obligation by transferring control of promised god or service to the customer at a point in time or over time

The default is at a point in time where -
1. the right to be paid is earned
2. customer has legal title
3. seller has transferred physical possession

It can also be recognised over time, this is in one of three circumstances
1. customer is simultaneously receives and consumes benefit - providing a service
2. If entity’s performance creates or enhances an asset the customer controls as it is being created or enhanced - extension to a property
3. Entity’s performance does not create an asset with an alternative use and entity has enforceable right to payment for performance completed to date e.g. bespoke construction of an asset

Question 7

How to measure progress

Answer 7

it can done via output or input methods

output methods
work certified as a proportion of transaction price over time e.g. surveyor says 60% of work has been done

Input methods
costs incurred as a proportion of total costs * revenue

Question 8

Contract costs

Answer 8

The direct incremental costs of fulfilling the contract are recognised as an asset, costs of winning the contract that are unique and specific to winning the contract. e.g. success fees paid to the agents

Asset is then amortised in a way that is consistent with pattern of transfer of goods and services.
They wont be incurred unless the contract was won